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Outsourcers Turn to Multisourcing To Reduce Risk

Outsourcing "megadeals" appear to be on the wane. According to market
watcher Gartner Inc., the number of reported megadeals -- contracts of $1 billion
or more awarded to a single vendor -- actually declined last year.

Does this mean that outsourcing itself is on the way out? Probably not. It
isn't that companies are less apt to outsource, Gartner stressed. In fact, outsourcing
activity is still on the upswing.

However, instead of contracting with an individual vendor, as
Sprint once did with IBM Corp., organizations are pursuing "multisourcing"
strategies -- i.e., contracting with multiple providers to help spread the risk.

"The decline in reported outsourcing contracts can be partially explained
by the fact that outsourcing is now 'business as usual' for many enterprises,"
said Kurt Potter, research director at Gartner, in a statement. "There
is more outsourcing activity, but fewer deals on average are reported, and this
creates the false impression that outsourcing is decreasing."

Last year, Gartner counted 10 outsourcing megadeals of $1 billion or more,
a decline of almost 17 percent from 2006. The total value of those deals was
$12 billion. That's the lowest aggregate total in eight years, according to
Gartner, which said you'd have to go back to 2001 (when companies notched $20.3
billion in outsourcing deals) to find a close comparison.

In this respect, both total contract value (TCV) and average contract value
(ACV) are decreasing, the analyst firm said.

"While further TCV erosion may be driven by the irreversible trends of
global delivery and IT services industrialization as many leading-edge organizations
move into their second and third generations of IT outsourcing, they may be
looking at deal expansion to include wider application or business initiatives,"
Potter said. "Although these opportunities are likely to evolve from a
single-provider to a multiple-provider engagement, in some cases, historical
ties between provider and recipient may retain the potential for megadeals."

What does it all mean? In a sense, according to Potter and Gartner, the outsourcing
industry is growing up. There's even a suggestion, they said, that it's becoming
commoditized.

"Many providers are pursuing smaller contract strategies as a consequence
of the new market realities, new competition and natural market pressures toward
commoditization, which reduces per-unit pricing. These strategies are often
in the form of pursuit of smaller contracts from larger clients, or larger contracts
from smaller companies," Potter commented.

Companies are also wary of jumping into huge deals with unproven providers.
As a result, companies frequently start small and increase their outsourcing
activities with proven providers over time.

As the outsourcing industry has grown, competition has become more fierce.
Providers are trying to nail down megadeals to meet their growth expectations.
With megadeals on the wane, however, providers will try to tweak their offerings
to appeal to smaller clients, Gartner predicted.

"Many providers are forced to pursue larger contracts to meet growth expectations.
Despite this pressure, providers should continue to evaluate different or at
least accommodate go-to-market and product portfolio strategies for smaller
clients," Potter concluded.

About the Author

Stephen Swoyer is a Nashville, TN-based freelance journalist who writes about technology.